Rebel With a Cause

The re-education of former World Bank chief economist Joseph Stiglitz.

May 23, 2002

Joseph Stiglitz is–as usual–running late. It is nearing 2:30 pm on a sunny afternoon in New York City and Stiglitz, an economist at Columbia University, is standing on the corner of 103rd Street and West End Avenue trying desperately to hail a cab. He needs to get across town to the Guggenheim Museum, where in five minutes he is scheduled to deliver an address on the state of the global economy in the aftermath of September 11. Stiglitz has not prepared a speech–half an hour earlier, as we were talking over lunch, he had completely forgotten the event was today–but that is the least of his worries. For Stiglitz, getting to appointments on time is a challenge; finding something provocative to say once he gets there is not.

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Over the past several years, Stiglitz, a celebrated theorist who was awarded the 2001 Nobel Prize in economics for his work on asymmetric information, has grown accustomed to being at the center of controversy. From 1997 to 2000, he served as senior vice president and chief economist at the World Bank–a title that did not stop him from publicly criticizing the bank’s sister institution, the International Monetary Fund. In a series of speeches and articles that culminated in a scathing April 2000 essay in The New Republic, Stiglitz blasted the IMF for being every bit as secretive, undemocratic and indifferent to the poor as its critics claimed. Stiglitz’s outspokenness, unprecedented for a high-ranking insider, infuriated top officials at the IMF and US Treasury Department, and eventually led James Wolfensohn, the World Bank’s president, to inform him that he would have to mute his criticism or resign. Stiglitz chose to leave.

He has not, however, quieted down. Since trading in his job at the World Bank for a chair at Columbia, Stiglitz has stepped up his crusade to reshape the popular debate about globalization. At Columbia, he has launched an organization, the Initiative for Policy Dialogue, designed to furnish developing nations with alternative views on everything from trade policy to financial reform. His lectures on campus draw overflow audiences, and being purged from the World Bank seems only to have enhanced his mystique in the developing world. He is an adviser to several developing countries, including Serbia and Bulgaria, and he meets informally with the leaders of many more, often dispensing advice that puts him at odds with the IMF. He was recently flown down to Mexico at the invitation of that country’s Foreign Ministry; afterward, he went to Ecuador to meet with leaders of that nation’s central bank.

Stiglitz, 58, is hardly the first person to accuse the IMF of operating undemocratically and exacerbating Third World poverty. But he is by far the most prominent, and his emergence as a critic marks an important shift in the intellectual landscape. Only a few years ago, it was possible for pundits to claim that no mainstream economist, certainly nobody of Stiglitz’s stature, took the criticism of free trade and globalization seriously. Such claims are no longer credible, for Stiglitz is part of a small but growing group of economists, sociologists and political scientists, among them Dani Rodrik of Harvard and Robert Wade of the London School of Economics, who not only take the critics seriously but warn that ignoring their concerns could have dire consequences. In his new book, Globalization and Its Discontents (Norton), Stiglitz argues that many of the complaints voiced by protesters in recent years–that IMF structural adjustment programs have caused widespread suffering; that free-trade agreements mainly benefit the rich; that privatization has proved disastrous in many countries–have a solid basis in fact. Unless the rules of global capitalism are radically altered, he warns, the gap between the world’s rich and poor, and hence the social conditions that have fueled instability in places like Pakistan, will not go away anytime soon.

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How did an economist who until recently enjoyed the trust of the world’s most powerful financial authorities come to sympathize with their most ardent critics? Stiglitz’s break with the World Bank has earned him a reputation in the business press and among policy elites as an enfant terrible inclined to stir up trouble wherever he goes. His academic peers, however, describe him in markedly different terms. “There is something innocently nice about Joe,” says Jagdish Bhagwati, one of his colleagues in the economics department at Columbia. “He’s a big puppy dog,” says Barry Nalebuff, an economist at Yale who has written papers with him.

In person, Stiglitz indeed comes across as good-natured and agreeable. When we first met, he invited me to his house for dinner. When he spoke about his experiences at the World Bank, his voice betrayed not a trace of bitterness. With his scruffy gray beard and frequently disheveled appearance–he is famous for walking around shoeless, and has trouble keeping his shirt tucked in–Stiglitz looks like the typical absent-minded professor. He also acts like one. Most of our interviews began at least an hour later than originally scheduled, a pattern that Stiglitz appeared to take in stride, as though this were an inevitable part of being Joseph Stiglitz.

And yet beneath the mellow exterior lies a fiercely independent, and at times disputatious, thinker. As far back as high school, when he was a star on the debating team, Stiglitz displayed a taste for intellectual combat, and an occasionally acid tongue. Asked once what developing countries should do with the annual reports the IMF prepares on member nations, Stiglitz recommended “picking it up, saying ‘thank you very much’ and dropping it straight in the garbage can.”

As a scholar, moreover, Stiglitz has been nothing if not iconoclastic, devoting much of his career to challenging one of the bedrock assumptions of neoclassical economics: that markets nearly always act perfectly on their own. Stiglitz has argued that because of asymmetric information–the fact that one party in an economic transaction often knows more than the other–inefficient outcomes are common, and therefore that government intervention is often warranted.

Stiglitz’s skepticism about markets can be traced back to his childhood. The son of an insurance agent and a public school teacher, he grew up in Gary, Indiana, the same steel town that produced another Nobel Prize-winning economist, Paul Samuelson. His family was middle-class, but Stiglitz says the periodic layoffs and plant closings in Gary sensitized him at an early age to the bruising realities of a concept–cyclical unemployment–he would later study as a graduate student in the economics program at MIT.

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Stiglitz enrolled at MIT in 1963. Five years later, at the age of 26, he was appointed a full professor of economics at Yale. Shortly thereafter, he was invited by the Rockefeller Foundation to go to Kenya. Witnessing the wrenching poverty in the slums of Nairobi sparked a lifelong interest in development policy. But Stiglitz noticed something else as well: In many developing countries, a seemingly inefficient system of farming–sharecropping–continued to predominate. From the standpoint of efficiency, this made no sense (sharecroppers have little incentive to work hard). It did make sense, however, if there was no other way for landlords to monitor workers’ output. The problem, in other words, was imperfect information, affecting both their behavior and contractual relations. Over the next few decades, along with a growing school of economists including Berkeley’s George Akerlof, he would produce rigorous mathematical models showing that asymmetric information was pervasive and made a measurable difference in everything from the way insurance companies operated to the way corporations treated their workers.

The author of a dozen books and several hundred prominent articles, Stiglitz has achieved eminence as a theorist that is not widely disputed. “If you had asked a broad number of economists before this year whether Joe would at some point win the Nobel Prize, literally 100 percent would have said yes,” says Alan Blinder, an economist at Princeton. Where scholars disagree is in the policy prescriptions that should be drawn from Stiglitz’s work. “There are people who would say information may be imperfect, but that government intervention to fix the problem will only make things worse,” says Blinder.

For all his skepticism about laissez-faire economics, Stiglitz has never been known as a radical. He is a liberal with populist leanings, not a Marxist, and before coming to the World Bank had served as chairman of President Clinton’s Council of Economic Advisers, not a job suited for hard-line critics of capitalism. Although he was aware of NGOs and activists who considered the IMF and World Bank neocolonial institutions, Stiglitz says he arrived at the World Bank full of optimism–some would say na&iuml;ve optimism–about the positive role he could play in shaping development policy. “I didn’t really take [the criticism] at face value,” he says.

That would soon change. In March of 1997, barely a month into his job, Stiglitz flew to Addis Ababa to meet with a group of Ethiopian officials who had become embroiled in a bitter dispute with the IMF. Several months earlier the IMF had suspended Ethiopia’s lending program after growing dissatisfied with the way its economy was being run. Stiglitz found the suspension baffling, for the Ethiopian economy appeared to be in good shape: Inflation was low, output was rising and, after decades of famine, the government had launched a rural development program focusing on the needs of the poor. The IMF, however, claimed that Ethiopia was too dependent on foreign aid, which could dry up and then cause a budget crisis, and had failed to meet certain conditions on its loans, such as deregulating its financial market.

Upon returning to Washington, Stiglitz pointed out that the Ethiopian government had resisted financial deregulation for good reason: In neighboring Kenya, the policy had led to higher interest rates, which devastated poor farmers. For several weeks, he waged an intense–and, in the end, successful–internal campaign to get the IMF program restored. But the experience left him deeply embittered. “I found the whole thing astonishing,” he says. “Not just the policies but the way the IMF interacted with this country, basically just telling Ethiopia what to do regardless of what its leaders thought.”

No sooner had the Ethiopia dispute been settled than the 1997 Asian financial crisis struck–and the tension between Stiglitz and the IMF deepened. To Stiglitz, the crisis, which began with the collapse of the Thai currency and soon spread to Malaysia, Korea, Indonesia and the Philippines, highlighted the danger of lifting constraints on short-term capital flows, a policy that both the IMF and US Treasury Department had enthusiastically promoted in the 1990s. Throughout Asia, governments that had followed their advice were reeling as investors whisked billions of dollars in speculative capital out of their countries overnight. Some nations that had maintained capital controls, such as India and Chile, avoided such problems while enjoying robust growth.

Stiglitz was not the only economist to question the orthodox view: In a widely cited article in Foreign Affairs, Jagdish Bhagwati, a prominent free-trader, blasted the “Wall Street-Treasury Complex,” which had pushed unfettered capital flows for its own enrichment. But while Stiglitz expressed his views in more measured tones, being an insider made them far more explosive. In late 1997 the London Economist ran an article contrasting Stiglitz’s position with that of the IMF and Treasury Department. The article, he would later learn, prompted an irate telephone call from Lawrence Summers, then Deputy Treasury Secretary, now president of Harvard, to James Wolfensohn. (Summers may have been especially angry because the article pointed out that he, too, had questioned the wisdom of liberalization before joining the Treasury Department, only to reverse course.)

Stiglitz had still not said anything directly critical of the IMF. When the IMF called on South Korea and other crisis-wracked nations to raise interest rates and cut spending as conditions for receiving loans, however, his frustration reached the boiling point. The IMF claimed these austerity measures would stabilize local currencies and restore investor confidence (not coincidentally, many of these investors might also be bailed out). But in meetings with top IMF officials, Stiglitz pointed out that most East Asian nations already had balanced budgets and high interest rates. Adopting austerity measures could spur massive unemployment and bankruptcy; Western nations facing recessions would never consider such policies. In response, Stiglitz says, IMF officials told him countries needed to “feel the pain” in order to recover.

Stiglitz did not wait long to strike back. In a speech delivered in January 1998 in Helsinki, he declared that the solutions to the problems facing developing countries “will not be found in the Washington Consensus,” whose rigid insistence on fighting inflation and “getting government out of the way” had failed to foster egalitarian development. At a press conference several months later, Stiglitz denounced the IMF’s response to the Asian crisis as an abject failure. “Who is paying the price?… Workers who are going to be put out of jobs.” Unemployment indeed increased fourfold in Korea, threefold in Thailand and tenfold in Indonesia, where cuts in food subsidies sparked riots.

Today, of course, most of the affected countries have recovered, leading the IMF’s defenders to argue that in the end, its prescriptions worked. “In the countries where IMF guidance was followed promptly and without fail, recovery was faster,” argues MIT’s Rudiger Dornbusch. Not so, counters Stiglitz: A study by Dani Rodrik found that nations that defied the IMF and kept interest rates low, such as Malaysia, recovered more quickly than those that heeded its advice, such as Indonesia.

To some degree, the mounting criticism from Stiglitz and other quarters has had an impact. IMF officials recently acknowledged the potential risks of capital market liberalization, and both the IMF and World Bank have begun speaking more openly about debt relief and poverty reduction. But while the rhetoric has changed, Stiglitz maintains that a doctrinaire ideology of “free-market fundamentalism” continues to shape policy. The IMF and World Bank are pushing developing countries to privatize their pension systems, for example, which is highly controversial in the First World. The IMF demanded fiscal austerity in Argentina, where unemployment had reached 20 percent and, in December, sparked riots that led to the government’s collapse. It preaches the gospel of free trade to developing countries–even though most Western countries built their economies by protecting certain industries and continue to subsidize some domestic producers. The blind push to privatize and deregulate has not only failed to fuel sustainable development, Stiglitz contends, but reflects an idealized vision of how markets function that neither economic theory nor concrete experience supports.

Such statements have made Stiglitz a hero to critics of globalization, some of whom believe institutions like the World Bank and IMF should simply be abolished. Stiglitz himself, however, believes these institutions should be reformed, not eliminated. He also believes the spread of global capitalism has enormous potential to benefit the poor. As an example of a country that has successfully integrated into the global marketplace–but in a manner that defies the conventional wisdom of the Washington Consensus–Stiglitz points to China. China has adopted privatization and lowered trade barriers, he argues, but in a gradual manner that has prevented the social fabric from being torn apart in the process. With little advice from the IMF, it has achieved high growth rates while reducing poverty. In a series of papers presented while he was the World Bank’s chief economist, Stiglitz pointedly contrasted this record with that of Russia, which, following a decade of “shock therapy” and IMF reforms, has seen poverty rise from 2 percent to 50 percent and life expectancy plummet.

Stiglitz’s interpretation is an important corrective to the standard free-market view (which portrays China, misleadingly, as a model student of Western economic reform). Some critics of globalization, however, believe a more measured assessment of China is warranted. “Stiglitz is certainly right to point to China as a country that has refused to follow IMF dogma yet achieved fast growth,” says John Cavanagh of the Institute for Policy Studies. “But China is an environmental nightmare. It is a country that systematically represses human rights and workers’ rights. To people in the global justice movement, it is not the blueprint of a successful society.”

Stiglitz’s optimism about China, says Cavanagh, underscores the limitations of his critique of globalization. “Stiglitz is part of a school of economists who have begun to question some of the central precepts of globalization,” he says, “but not the overall framework.” Stiglitz does, in fact, take pains to ground his critique of the Washington Consensus in conventional economic terms, emphasizing that even by standard measures, such as growth, the IMF’s prescriptions have often failed.

On the other hand, as Cavanagh acknowledges, Stiglitz has done more to damage the IMF’s reputation than any other living economist. And he has not limited his criticism to discrete events such as the Asian financial crisis. While at the World Bank, Stiglitz delivered a series of prominent speeches arguing that growth should not be the sole measure of success, and that developing countries should be able to decide for themselves which policies to adopt. It is a theme he elaborates in his new book, in which he argues that a central goal of development policy should be to benefit and empower the poor.

In retrospect, the only thing Stiglitz seems to regret about his tenure at the World Bank is that he did not speak out sooner. “It took me a while to realize that there was no interest in having a debate about these policies. It was, ‘This is how we do things and that is it.’ When it became clear to me that some of these things were surely wrong, it seemed derelict not to speak out.”

Not surprisingly, those on the receiving end of Stiglitz’s criticisms hold a different view. “There was plenty of internal debate” about policy, says Stanley Fischer of the IMF. “But to have vociferous public criticism from someone inside the institution–it was surprising and strange.”

Says World Bank president Wolfensohn, “Joe’s character is to go straight out…. Institutionally, it’s important that when we are projecting the decided view of the institution, we all stick together.”

Notwithstanding such pressure, a growing number of people within the World Bank seem to be questioning the official wisdom–and to be paying the price. In June 2000 the economist Ravi Kanbur resigned from the bank after reportedly feeling pressure to tone down the emphasis on poverty reduction in the annual World Development Report. More recently, the World Bank launched a disciplinary investigation into the conduct of William Easterly, a staff economist who had published an editorial in the London Financial Times (based on his book, The Elusive Quest for Growth) that questioned the effectiveness of IMF and World Bank development assistance projects in the postwar era. “The World Bank is like a church–it has a dogma,” says David Ellerman, another staff economist, who recently published an editorial in a World Bank newsletter calling for greater tolerance for dissenting opinions. “The problem is that we are dealing with some of the most complex issues facing mankind.”

Now that he is no longer bound by institutional constraints, Stiglitz is speaking his mind more than ever. His message is at once simple and incendiary. As he declared recently before a packed hall at Columbia’s School of International and Public Affairs, “Countries have to own their development strategies…. Development is not just the accumulation of capital–it is about a transformation of society, a change in ways of thinking. That can’t come if countries have everything dictated to them.”

Stiglitz was there to talk about his new organization, the Initiative for Policy Dialogue, through which he hopes to do nothing less than end the World Bank and IMF’s fifty-year monopoly on development policy. The IPD will, among other things, bring together task forces of economists to outline alternative approaches to a range of policy questions (trade, macroeconomic policy, pension reform). It will also oversee country dialogues, in which economists, policy-makers and members of civil society from developing countries will debate strategies and ideas. Such dialogues have already taken place in Serbia, Vietnam, Ethiopia and the Philippines.

Though ambitious, there is something amorphous about the IPD’s mission. The organization does not, for example, put forward a clear-cut, alternative blueprint to the policies of the Washington Consensus. There are also questions about whether Stiglitz, whose lack of management skills was notorious at the World Bank, is capable of running such an organization effectively.

If the IPD’s agenda seems nebulous, however, that’s in part because its founder does not really believe in blueprints. The whole problem with the Washington Consensus, Stiglitz argues, is that it represents “cookie-cutter” economics: a uniform set of prescriptions imposed regardless of history, social conditions, institutional factors, information asymmetries. In a forthcoming essay on the ethics of serving as an economic adviser, Stiglitz argues that rather than prescribe solutions, economists should emphasize choices, underscoring the risks and trade-offs of pursuing various alternatives. As a rallying point for activists, promoting dialogue and highlighting alternatives may seem frustratingly murky. Yet there is also something potentially radical about it. At bottom, it is an argument for an end to unilateral rule by global elites, and for greater democracy in economic decision-making. It also puts the lie to the notion that in a global marketplace, there is only one true road to prosperity.

As Stiglitz notes, during the 1990s the number of people living in extreme poverty (less than $2 per day) increased by nearly 100 million. Other studies show that in places like Latin America, the policies of the Washington Consensus have not even succeeded in promoting growth, much less in reducing inequality. The events of September 11 bring home the fact that addressing such issues is important for security reasons as well as for moral ones. The point has not been lost on Stiglitz. “Clearly, terrorists can be people like bin Laden who come from upper-income families,” he told me. “Nevertheless, abject poverty and economies without jobs for males between the ages of 18 and 30 are particularly good breeding grounds for extremism. Solving the economic problems doesn’t eliminate the risk of terrorism, but not solving them surely enhances it.”

Eyal PressTwitter Eyal Press is a Nation contributing editor and the author of Beautiful Souls: The Courage and Conscience of Ordinary People in Extraordinary Times and Absolute Convictions: My Father, a City, and the Conflict That Divided America. He is also a Puffin Foundation Writing Fellow at The Nation Institute.